Dr Richard Fairchild is a Senior Lecturer in Corporate Finance in the School of Management at the University of Bath. Dr Baris Yalabik is a Senior Lecturer in the School of Management at the University of Bath.
At the recent COP26 negotiations in Glasgow (November 2022), international governments recognised the growing, urgent need to reverse the damage being inflicted on the global environment and climate before it is too late.
As part of the negotiations, a major agreement was formed around the reversal of deforestation, and developed nations and deforesting nations (who are mainly developing nations along the rainforests and the Amazon River) promised to end deforestation by 2030. Why is this important? By chopping down trees, deforestation contributes massively to the build-up of CO2 in the earth’s atmosphere.
But how successful will this important agreement be? To coincide with the recent World Environment Day, it is timely to consider the risks and opportunities arising from this major deal. In our recent paper we developed a game theoretic analysis to represent the deforestation agreement, including both economic and psychological factors and incentives in our mathematical model.
Game theory is a very powerful tool that enables an analysis of the economic motives and behavioural/psychological and emotional factors affecting competing parties’ strategies and incentives - to either cooperate and act in the common good, or ‘defect’ and act in a very self-interested manner that ultimately destroys the common good, and even hurt the individual player.
In our analysis, we employed game theory to understand the economic and behavioural conditions affecting the long-term success or failure of the deforestation agreement. Our framework captures the following:
First, deforestation is mainly taking place amongst poorer, developing and emerging economies of the world. Currently, this behaviour forms an essential part of these nations’ economic activity, growth and GDP. Thus, each of these developing nations face a trade-off between individual economic incentives (continuing to chop down their forests for their economic development), and the good of the global climate (reducing/eliminating deforestation, harming their own economy, but helping the global climate that we all share in).
Second, it is in the collective interests of all nations (developing and developed) for deforestation to be greatly reduced at the minimum, and at the maximum, completely eliminated. However, each individual developing nation has an incentive to renege on the agreement, and carry on with ‘business as usual’ in order to support its individual economy, free-riding on the reduction of deforestation by other developing nations.
In a grim self-interested equilibrium, all developing nations think like this, leaving it to the other developing nations to stick to the agreement. Thus they all defect/renege on the agreement and the deforestation problem is not solved.
However, the developed nations seem to have recognised this free-riding problem (and recognised the current importance of deforestation activities for the developing nations’ economies). Thus, as part of the COP26 agreement, future economic and financial support has been promised to the developing nations who eliminate deforestation, to help them build their economies, and replace deforestation with other types of industry. This financial support has been promised both by international developed governments, and from private money, through financial institutions.
But our game-theoretic approach recognises that this could be a problem. This money is promised in the future, after the deforesting activities have been eliminated. However, once the developing nations keep their part of the bargain, and help save the planet, what is to stop the developed nations and institutions reneging on their part of the deal, and not providing the promised financial support? And, if developing nations anticipate this (that is, they do not trust the developed nations), then this will weaken their incentive to eliminate deforestation in the first place.
Indeed, Jo Blackmon, Head of Forests Policy and Advocacy at Global Witness notes a lack of accountability in the agreement, and the need for strong legal systems to back it up. She warns:
“While the Glasgow Declaration has an impressive range of signatories from across forest-rich countries, large consumer markets and financial centres, it nevertheless risks being a reiteration of previous failed commitments if it lacks teeth… If global leaders are serious about stopping forest destruction then they must back up today’s announcements with a commitment to bring in strong and binding national legislation that makes it illegal for companies and financial institutions to fuel deforestation.”
Thus, the answer to the question, ‘How successful will the COP26 agreement on deforestation be? appears to be a grim ‘Not very successful!’. However, this answer is based on the homo economicus view of unemotional, cold, calculative, self-interested full rationality, maximising personal payoffs, with no regard for the world. Through our game-theoretic model, what happens when we introduce other behavioural, psychological, emotional factors?
First, we considered a warm-glow, conscience, ethical feelings, and a shared identity (at its most basic, nations who are prepared to think beyond narrow self-interest, to think about their place in the world, and how to act to reduce the climate crisis). Indeed, some argue that signing an environmental agreement puts a nation into a ‘climate club’, providing an emotional incentive to behave in the interests of the planet. This warm-glow and conscience can reduce free-riding and improve the chances that the developing nations will stick to the agreement to eliminate deforestation.
Second, we considered two factors that may cement the agreement on future financial transfers from the developed to the developing nations to support them after they have eliminated deforestation. The first factor is economic/legal - having rigorous contracts around the financial agreement, and a strong legal system that can sort out any disputes over the financial transfers.
The second factor is behavioural/psychological/emotional - if the developed and developing nations can cultivate a mutual identity, a shared ‘warm-glow’, such that the developed nations feel a conscience, and a positive (negative) feeling from paying (with-holding) the promised payments, then they are more likely to keep their promises to support the developing nations financially and economically. This will drive greater trust, and greater elimination of deforestation in the first place. If these economic and behavioural factors fall into place over the life of the agreement, it may be successful.
Encouragingly, there is going to be a COP27 this year, and at the recent MENA meeting in Dubai (22 March 2022), UN High Level Climate Action Champions (Nigel Topping for COP26 and Mahmoud Mohieldin for COP27) launched the ‘Work Programme of the Marrakesh Partnership for Global Climate Action for 2022’, which now appears on the UFCCC website.
Given such initiatives, and the fact that the UN has appointed climate action champions, perhaps there is hope for increased international environmental cooperation in the coming years. For the sake of the planet, we need to ‘watch this space’.
All articles posted on this blog give the views of the author(s), and not the position of the IPR, nor of the University of Bath.
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